Guest Post: Backwardation In Gold And Silver

On Monday, May 14, something happened that hasn’t happened since Dec of 2008. Two successive near-month precious metals futures contracts were in backwardation at the same time. To oversimplify, backwardation is when the price of a futures contract is lower than the price in the spot market. It should not be possible for it to happen in gold and silver.

Even in this “new normal”, however, it has been only one at a time: one metal, and one month. This is because the backwardation occurs with the “contract roll”, as people sell the expiring contract and buy one farther out. The selling pressure on the expiring contract is most intense for a short period of time. After that, the spread widens as the market makers move on, the selling pressure abates, and with wider spreads all around, both the basis and cobasis fall into oblivion. Except for the December month, gold and silver futures are liquid in different months.

That is why one does not see both monetary metals in backwardation simultaneously because they are “out of phase” by 30 days and temporary backwardation typically persists for only about a week or so. And it should be even harder to see two different successive near-dated futures contracts in backwardation.

On May 14, this is precisely what occurred. Both May and July silver are backwardated. And June gold is backwardated. Incredibly, the May silver contract is giving away a 3% annualized profit to anyone who would sell physical silver and buy a May future that delivers in a few weeks (thus recovering the same position). Even more incredibly, no one can or will take the profit that is dangling out there!

July silver backwardation is smaller, and June gold backwardation is even smaller. But still! This should not be possible at all.

Because the next successive contracts are not in backwardation (in silver, all contracts from Jul 2015 on are backwardated), it is not a collapse of trust. I think that it is a lack of unencumbered metal. The markets for precious metals, silver more than gold, have become quite tight.

Why the hell would Ron Paul continue to plead for money when it's crystal clear he's not getting the nomination? Oh, that's right... I forgot... he's a thirty year, career politician who uses unrealistic rhetoric to dupe Republican wingNUTS - otherwise known as libertardians - into thinking the colonial past is America's future.

You guys have repeatedly proven that you don't want answers or the truth ... you want an echo chamber. If I explain to you why there's backwardation, you'll only tell me that's it's bullshit and that your coin purchases last weekend are about to blow up JPM.

Besides, if the paper price of spot metal doesn't matter (the prevalent mantra around here), why all the hoopla about backwardation?

What's wrong with that? Hitler was a national socialist, and obama's a socialist with a leninist/stalinist/maoist tinge to it. Besides, socialism and communism are basically brother and sister. Siblings from the same father with the same goal; world government. Just like you and MDB are from the same father, the Bernanke, with the same goal; deception.

Son, we live in a world that has printers, and those printers have to be guarded by men with guns. Who's gonna do it? You? Lloyd Blankfein? I have a greater responsibility than you could possibly fathom. You weep for Santiago, and you curse the Banksters. You have that luxury. You have the luxury of not knowing what I know. That Santiago's death, while tragic, probably saved lives. And my existence, while grotesque and incomprehensible to you, saves lives. You don't want the truth because deep down in places you don't talk about at parties, you want me on that printer, you need me on that printer. We use words like interest, easing, and liquidity. We use these words as the backbone of a life spent debasing something. You use them as a punchline. I have neither the time nor the inclination to explain myself to a man who rises and sleeps under the waves of the very liquidity that I provide, and then questions the manner in which I provide it. I would rather you just said thank you, and went on your way, Otherwise, I suggest you pick up an ink cartridge, and man a printer. Either way, I don't give a damn what you think you are entitled to!